Recruit in haste, regret at leisure – Reducing employee fraud

HR Directors should beware of panic hiring to take advantage of economic recovery, being sure their candidates are who they say they are.

According to the latest CIPD/KPMG Labour Market Outlook Survey, 65 percent of employers were planning to recuit employees during the final quarter of 2009, and while there is still some way to go, this does represent an increase on previous figures for 2009 and points to the beginnings of a recovery.

The demand will be intense for HR to find good people quickly and there will be a lot of pressure to get things right. Against increasing pressures to reduce costs, HR will need to remain diligent in checking backgrounds and reference checking or run the risk of recruiting unqualified candidates or worse, people who are focused on depleting company resource through employee fraud or identity theft.

The implications for an organisation of placing the wrong person in a position can be severe and have potentially high financial, legal and reputational consequences. In order to mitigate against these risks, it’s not surprising that more and more companies are implementing stricter background screening procedures for potential employees and ensuring line managers are properly equipped to make the right hiring decisions.

What are the recruitment risks?

Getting recruitment decisions right is essential at the best of times but in the face of economic uncertainty, it becomes even more critical. In this post-recession environment, the task of recruiting the best talent certainly presents some challenges for HR.

In the era of Facebook, You Tube and Twitter, not only will HRs need to navigate new recruitment processes such as social recruiting, and contend with the organisational challenges associated with it, but the recession has meant that employers now face a number of specific recruitment risks. With increasing numbers of candidates fabricating or exaggerating their CV’s in order to stand out in a competitive market or in the most extreme case, to commit employee fraud against an organisation, finding ways to limit uncertainty in the hiring process has never been more important.

Certainly it would seem that lying on CVs is on the increase. Surveys suggest as many as a quarter of job seekers deviate from the truth on their CV. The most common distortions include salary (23 percent), level of previous experience (14 percent) and educational qualifications (13 percent), followed by dates of employment (10 percent) and job title (9 percent).

According to research from the CIPD, 25 percent of employers had to withdraw job offers last year after finding candidates misrepresented themselves in their applications. It has been reported that 39 percent of UK organisations have experienced a situation where their employee screening procedures have allowed an employee to be hired who was later found to have lied or misrepresented themselves in their application. The recent high profile cases against former NHS executives are testimony to this, highlighting the fact that CV fraud is not limited to junior candidates and that it can be committed by people in well paid, senior positions.

Improvements in anti-fraud measures over recent years have pushed organised criminals to look at new options and approaches. This means that there is the possibility that fraudsters will increasingly look to take on the identities and career histories of third parties to secure employment within the companies for the purposes of committing fraud. For HR, the reality is that CV’s can no longer be accepted at face value. Organisations need to be extremely careful about people they employ in positions of trust and have robust anti-fraud policies and protection measures in place to cover every eventuality.

The possibility of hiring someone who may pose a direct criminal threat to your organisation may seem rare, but it is in fact more common than many people realise. Indeed, BDO Stoy Hayward’s 2009 Fraudtrack report found that 29 percent offraud was committed by senior management, equating to a cost of £358m to UK organisations and that 8 percent was attributed to employees, equating to £95m. The fact that the value of reported fraud in the UK has increased by 153 percent since 2003 reminds us how serious a threat this is to UK businesses. The raft of recent fraud reports and reviews suggest that the UK is heading for an unprecedented surge in fraud over the next 2 years, as businesses and individuals struggle to survive the economic downturn. According to KPMG’s annual fraud barometer, the value of criminal frauds prosecuted in the courts reached a 13 year high of £1.1 billion in last year, but it is feared the worst is yet to come.

What constitutes a bad hire?

The risks are clear, but what constitutes a bad hire? As part of Experian’s focus group research with HR directors and managers, we explored this issue in an attempt to define what is really meant by a ‘bad hire’. While there are numerous types of ‘bad’ hire, including the criminal element, the most common ‘bad hires’ can be categorised as follows:

The under-qualified hire – This is where the individual lacks the necessary skills to be able to perform the role to the required standard. The financial implications of this can include costs associated with retraining, the cost of managing them out of the business as well as the additional overtime that others will need to put in to cover the role. This type of bad hire is likely to be the most expensive at the senior level due to binding contracts and increased legal obligations.

The under-performing hire – It is not only insufficient skills that can be a problem. An inability to perform in the role could be down to a bad cultural fit or a lack of will to perform. In these cases, it’s not so much about what the person did, so much as what they didn’t do in that they simply didn’t excel in the role and failed to meet the employer’s expectations.

The under-whelmed hire – This is when the job itself does not match up to the expectations of the individual taking it. In these instances, the employee is often dissatisfied in the role within three to six months, while the costs associated with recruiting, interviewing and inducting them into the company cannot be recovered.

While HR can have a significant influence on preventing the above scenarios with the right recruitment and employee screening processes in place, it is in the final instance that HR can play a greater role. As much as employers’ risk employing candidates without the necessary skills or experience to do the job, conversely, there is also the danger of line managers or departmental heads overselling a position in order to secure a highly qualified or even over qualified candidate. In these cases, HR has a responsibility to clearly define roles and responsibilities to new recruits or risk the consequences of losing an employee (at significant expense) only a few months down the line.

Findings from the CIPD’s latest Recruitment Retention and Turnover survey indicate that around a fifth of new starters leave their organisation within the first 6 months (19 percent). This emphasises the need for organisations to more accurately match candidates to specific roles and for them to look at the strength of their induction process in helping people integrate in to the workplace quickly and effectively.

For the lower end of the pay scale, you are likely to pay around 10 percent of salary to recruitment agencies for sourcing a new hire. For more senior positions, this could be between 30 to 40 percent of salary. Added to that, line managers may spend as much as six hours interviewing staff for one low level hire, significantly more for senior level positions.

According to the CIPD, the average recruitment cost of filling a vacancy per employee is £4,000, increasing to £6,125 when organisations are also calculating the associated labour turnover costs. For a senior manager role, these figures rise to £10,000 and £9,000 respectively and you can double these for the cost of rehiring if things don’t work out the first time.

One bad senior management appointment could cost £10,000 to hire and another £10,000 to replace. Add to that three months salary to manage them out of the business. Gross misconduct makes it quicker to fire the individual, but the costs will be far higher in other areas. For example, this could be £100,000 plus legal fees for a five day tribunal (time spent with witnesses, managing the process, claims for compensation and so on).

So while some put the cost of mis-hiring at as much as 14x the employee’s base salary, the CIPD puts this figure somewhere between 4-6x. Whatever the number, it’s a significant expense that is costing the UK economy dearly, with estimates from the Future Foundation putting the cost of managing poor hires at over £24 billion.

The hard costs alone are enough of a hit to company balance sheets (especially after all the associated redundancy costs over the 12-18 months) but what are the real implicated costs to a business from a bad hire? The soft costs are often ignored and never calculated, but HR directors more than any others are aware of the full impact that bad hiring decisions can make. The indirect costs which are difficult to measure but still very significant include: reputational damage, loss of customers/marketshare, the negative effect on co-workers’ morale and performance and productivity losses.

Unfortunately poor recruitment decisions happen, but often such costly mistakes can be avoided by well designed internal recruitment procedures and a robust employee screening process. An interview can only reveal so much and no matter how good a judge of character someone is, intuition is fallible and should therefore always be supported by proof.

Employee screening is about putting in place a process that ensures that an organisation both complies with legislation and takes a rounded, balanced and accurate view of a candidate’s background.

Do verify a candidate’s identity: Proper identity authentication is key to the employee screening process. Checking that a candidate is who they say they are should always be the starting point as background screening is often rendered ineffective if a candidate’s basic details are incorrect. A candidate may attempt to avoid a criminal records check or a potential employer gaining references by omitting addresses or providing false information. It’s also important to get the whole picture, so although they may have an impeccable record in the UK, if they are new to the country, a thorough background check needs to examine their record in previous countries of residence.

Do get the candidate’s consent: Background screening is designed to protect the employee as much as the business, so it’s essential to gain their permission at the outset. Experian’s own experience has also shown that there is a 15 percent drop out rate when applicants are made aware that background checking is involved in the recruitment process, highlighting the strength of having robust checking procedures in deterring time wasters and potential fraudsters. When it comes to screening potential candidates, there seems to be some confusion around data privacy, employment and even human rights law, but as the Serious Organised Crime Agency (SOCA) pointed out recently, the Data Protection Act should not be an excuse for firms failing to carry out effective employee screening.

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